The often-repeated claim that a 20% market decline is an "official" bear market is pure Wall Street BS.
There is no official standard for what constitutes a bear market. It's a classic big lie.
There's no official body to set the standard, and it couldn't be done even if there was.
Setting aside all commodities, bonds, real estate – anything else that's traded daily – stocks alone are bought and sold in around 60 different markets all over the planet, 24 hours a day, seven days a week, 365 days a year. Each has a wildly different capitalization, as well as vastly different betas and standards of volatility.
There can be no universal "20% down standard" to apply to all markets, all instruments, and all commodities. Not by any stretch of the imagination.
The idea that there could be an "official bear market" is absurd on its face, yet the media keeps repeating this nonsense ad nauseam.
It's another example of them being clowns and intellectually lazy stooges for the Wall Street establishment.
It would be funny… if the lie wasn't told at your expense. It'd be funny if millions of investors didn't fall for it hook, line, and sinker every time the lie is floated in the media.
Here's How Bear Markets Actually Reveal Themselves
Goebbels said to make a lie really big and repeat it often, and soon enough everyone will accept it as truth.
That's what the "20% rule" for a bear market epitomizes: A coterie of financial media PR flacks kept repeating it, and eventually everyone accepted it as truth.
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But bear markets are matters of price patterns and time, not percentages.
A hundred or more years ago, Charles Dow, William Peter Hamilton, and Robert Rhea never once mentioned any percentage when defining a bear market.
Instead, they made it a matter of the Dow Industrials and Rails making a secondary low lower than the last low after lower highs, and that each average must confirm the other.
They were never intended as timing tools, but the standard they set is far more reasonable in identifying a bear market than a straight, arbitrary percentage.
They incorporate price direction, pattern, and time, not percentages.
Since the early 1980s, when I first started using computerized indicators to track price momentum and cycles, we have had the benefit of knowing that momentum precedes the trend.
Momentum slows first, then prices break down later.
This is not rocket science. We know that history rhymes.
There are differences from one era to the next, but there are sufficient similarities that if we are paying attention, we can recognize the process as it is happening.
Bear market formation is part of a process of the shift in long-term momentum leading to a downtrend in prices. With lower highs and lower lows since February we seem to be on the brink of a major downtrend.
And with the U.S. Federal Reserve pulling some $30 billion a month out of the markets and banking system, sapping it of vital liquidity, the overall trend could hardly be more bearish. I've told my Sure Money readers to build a 60% to 70% cash position by May, but in any case, selling into rallies is the smart move now.
Call it what you want. If you want to wait until it's down 20% to call it a bear market, that's fine with me… But whatever you do, don't cling to that "official 20% standard" as a signal to sell – that's a good way to "officially" lose a lot of money.
Now, what possible purpose does it serve for Wall Street to pretend that there's an "official" standard for a bear market and that it's 20% down?
That one is easy to answer…
Why Wall Street Lies About Bears
They want to keep you – and everybody else – from selling so that they can distribute their inventories into an orderly market without having to take too much of a market hit to their accounts!
They want to keep you and all their other customers (especially institutions) long the market and buying on the way down so that they can short stock to you.
Then, once they have built large enough short positions, they pull the plug by pulling their bids, letting prices fall while they pile up profits on their short inventories.
Then when the S&P 500 or the Dow is finally down 20%, and their media stooges declare an "official" bear market, you can bet your last dollar that, as the public panics, a capitulation low will be set within a few days and a decent-sized intermediate-term bear market rally will unfold from there, whereby the big Street players will clean up and cash in, bloated with money they've siphoned from folks who don't know any better.
Remember, bear market rallies can be explosive events, and if you go into them with your eyes open, aware of what Wall Street's really up to, you can profit there, as well.
Lee Adler's Sure Money readers have been preparing for the bear market for months now, with all of Lee's charts, analysis, and profit protection recommendations. You can get all of Lee's research updates e-mailed to you, at no charge whatsoever, three times each week by clicking here.
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About the Author
Financial Analyst, 50-year charting expert, finance + real estate pro, and market analyst; published and edited the Wall Street Examiner since 2000.